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Dirty Linen In The Channel Islands?

January 29, 1995

Business Week International International Business: BANKING

DIRTY LINEN IN THE CHANNEL ISLANDS?

The glistening sun, medieval castle, and narrow, cobbled streets lined with cafes should make quaint St. Peter Port the haunt of tourists. But instead, the capital of Guernsey is teeming with pin-striped bankers carrying briefcases. Guernsey, one of the Channel Islands off the coast of Normandy, is home to 74 banks, an astonishing number given its population of just 60,000.

Guernsey and Jersey, its island neighbor, for decades have been sleepy offshore tax havens that wealthy Europeans used to protect their assets against inheritance and income taxes. But lately, business is booming: Bank deposits have quadrupled in the past decade, to $160 billion (chart). Channel Islands money managers now oversee a tidy $55 billion, and the islands have become a major offshore insurance center as well. Some even see them catching up to such other offshore financial centers as the Bahamas, the Cayman Islands, and Luxembourg.

But the boom may have a dark side. Investigators in Europe and the U.S. suspect that local secrecy laws, which attract the wealthy, also act as a magnet that lures criminals. Guernsey and Jersey, they say, have become frequent stops on the world's electronic money laundering circuit. Judge Gherardo Colombo, a prominent member of Italy's "clean hands" campaign, recently termed the islands one of the most difficult places to track down bribes and kickbacks paid to corrupt Italian politicians.

Island regulators and the Conservative British government deny there's a dirty-money problem in the islands. But U.S. law enforcement officials and members of Britain's opposition Labor Party allege that money launderers and other criminals use the islands to hide ill-gotten gains.

Labor officials say they'll push for a clampdown on the islands if, as expected, they win in elections that must be held by 1997. "I want Europewide action to cut out tax havens and tighten the banking laws of havens like the Channel Islands," says Labor's shadow home secretary, Jack Straw.

A crackdown on the Channel Islands would be the latest move in a long game of cat and mouse between global bankers and regulators over financial secrecy. For years, anyone looking for no-questions-asked money management probably would have gone to Switzerland. Then, international pressure led the Swiss to open up. But the islands' secrecy rules and political stability, along with tax advantages for depositors and banks, have led such lenders as Credit Suisse, Swiss Bank, and Union Bank of Switzerland to open up shop in Guernsey and Jersey. Swiss-owned banks now claim 40% of Guernsey's deposits. These and other banks offer accounts in multiple currencies and with interest rates comparable to those on the mainland.

Although they have been ruled by the British crown ever since William the Conqueror stormed Britain in 1066, the islands remain independent in everything but defense and international relations. They aren't subject to British or European Union banking and tax rules. True, the islands have enacted drug laws requiring banks to report suspicious transactions. But because depositors can hide behind local corporate fronts, it can be nearly impossible to pry details out of regulators. "The Channel Islands go out of their way to make it difficult for people to get information," says Jack Blum, a Washington attorney and former investigator into the defunct Bank of Credit & Commerce International. In fact, Judge Colombo charges that the islands have stonewalled his anticorruption probe for two years.

BLOCKING BCCI. Officials on Guernsey and Jersey deny thwarting Colombo's probe. They point with pride to their rejection of banking licenses for the scandal-plagued BCCI as evidence that they're vigilant against financial abuses. But the regulators concede that it's difficult to regulate the formation of fronts whose ownership may be impossible to determine.

Guernsey and Jersey now have more than 30,000 such companies. "No country has figured out how to solve this problem," says Jersey Financial Services Dept. Director Richard C.A. Syvret. But even if the islands do tighten up, money launderers will hardly disappear. They'll just find another offshore haven to keep their money from prying eyes.By Heidi Dawley in St. Peter Port, Guernsey, with Paula Dwyer in London and Silvia Sansoni in Rome